GDP growth incentives and earnings management: evidence from China
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GDP growth incentives and earnings management: evidence from China Xia Chen 1 & Qiang Cheng 1
& Ying
Hao 2 & Qiang Liu 3
# Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract Using data from China, we examine whether and how the incentive to boost GDP growth at the government level affects earnings management at the firm level. We find that firms in provinces with GDP growth lower than the national level or the average of the adjacent provinces are more likely to engage in earnings management than firms in other provinces. Specifically, they are more likely to inflate revenues, overproduce, and delay asset impairment losses. The aggregate earnings management induced by GDP growth incentives accounts for about 0.5% of GDP. The results are stronger for local state-owned enterprises, in provinces with a lower level of marketization, for firms in provinces with younger governors, and in the years immediately prior to the turnover of provincial officials. Overall, this paper provides systematic evidence on how firms engage in earnings management to boost the GDP growth in their provinces. Keywords GDP growth . Earnings management . China JEL codes E60 . M40
* Ying Hao [email protected] Xia Chen [email protected] Qiang Cheng [email protected] Qiang Liu [email protected]
1
Singapore Management University, Singapore, Singapore
2
Beijing Normal University, Beijing, China
3
Zhejiang University, Zhejiang, Hangzhou, China
X. Chen et al.
1 Introduction We examine whether and how GDP growth incentives at the government level affect earnings management at the firm level. The gross domestic product (GDP) is an important measure of the economic development of a country (e.g., Henderson et al. 2012; BEA 2017). Many important government decisions, such as budget and monetary policies, and many corporate decisions, such as investments, are affected by the level and growth of GDP. However, despite the importance of GDP and the potential adverse consequences of reporting inaccurate GDP figures, GDP is difficult to measure and GDP figures are often inaccurate, especially in developing countries, partly due to weak statistical infrastructure (e.g., Henderson et al. 2012; Johnson et al. 2013). Moreover, the reported GDP figures are often “manipulated,” especially in countries that are weak democracies (e.g., Magee and Doces 2015).1 GDP manipulation is arguably most prevalent in China. Whenever China announces its GDP figures, many people express skepticism, including high-ranking government officials (e.g., Owyang and Shell 2017).2 Although the reliability of the national GDP figures has improved, GDP manipulation prevails at the provincial level.3 For example, the sum of the GDP of all of the provinces is invariably higher than the national GDP calculated by the National Bureau of Statistics of China (NBS), with the discrepancy being as high as RMB3.5 trillion in 2010 or 8% of the national GDP.4 (The discrepancy in the United States is usually around 1% of the national GDP.) Recently, a number of pr
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